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What You Do When Last Year's Strongest Stocks Are This Year's Weakest

NEW YORK (AdviceIQ) -- Many of the biggest-winning stock sectors of 2013 are the largest losers this year. This reversal stems from a move from last year's predominantly risk-on thinking (confident investors opted for riskier stocks) to the current, more pessimistic risk-off outlook.

Your response to this turnabout should be to ignore the temporary gyrations and analyze these stocks deeply before you buy, sell or hold them.

The retreat of the Federal Reserve's bond-buying program and turmoil in emerging markets get the blame for the 2014 stock market's rocky start.

Consider consumer discretionary stocks, which are goods and services that people do not require to live, ranging from big-ticket items such as autos and refrigerators to less costly things such as clothing and services such as hotel stays. Last year, this category was No. 1, with a 41% return. This year, the sector is the worst-performing, down 8.5%.

On the other side of the spectrum, utilities, the 2013 laggard (gain: 8.8%), has done the best in 2014, up 2.2%. Utilities seldom lead the list, as they are slow-growing and heavily regulated. Their dividends are nice, a sure sign of a mature industry. Their relative safety is appealing lately, though.

The exception to this role-reversal story is health care, the No. 2 performer of 2013 (up 38.7%). Well, it still is No. 2, at minus 1.1% this year. That it has held together so well is a bit surprising, considering the messy Obamacare implementation.

What sub-\sectors did well in 2013 and are keeping the momentum? The most obvious is airlines, which bucked the trend. Another, distillers and vintners, is aided by the acquisition of the company that makes Jim Beam. Interestingly enough, we also cannot jump to the linear conclusion that today's persistent winners will remain so.

The market can be very vexing. Aside from sudden switches from winner to loser is the problem of the flat-lining stock. We have all been there before, and I am sure many of you have a similar experience: when you own a specific stock of a company and it just does not do anything. Ever. Paint dries quicker or a pet rock has more activity than this stock. The longer the period of zero performance, the more the frustration builds for many investors. How might one handle this circumstance?

First, let me introduce a quote from the Gilbert & Sullivan operetta H.M.S. Pinafore that is applicable: "Things are seldom what they seem, skim milk masquerades as cream." In many instances, what appears to be good is actually not so good. Conversely, what might look to be awful is really wonderful.

The important question is what exactly do you own from a business perspective?

Holding a stock that does nothing for long periods is very normal. The idea every stock you own in a portfolio is going to advance like a rocket (think Google, Twitter or Tesla), is just not realistic.

If you do the research on equities, the vast majority of the time you own stocks, the largest percentage of your gains come maybe three, four or five years after you bought the stock. What is critical is to monitor your holding and to see how the operational results match up with the stated management plans.

Next, realize that companies are dynamic entities, which means their businesses are evolving constantly. You have to identify whether they are changing for the better or, worse, potentially declining.

In your analysis, recognize most public companies have all kinds of possibilities they are working on: expansion plans for additional markets, new products, research and development, broader distribution, adding human capital, application of new technologies, potential merger and acquisitions, joint ventures, etc.

The more of these items you can identify, the better, because in many cases, they are not necessarily reflected in the price of a stock. Even though equity prices are typically efficient over a long period, every day there are examples where a stock is mispriced.

As an enterprising investor interested in maximizing our potential returns, don't let an inactive or slumping holding stop you from doing your homework. If something goes up or down radically, that may not be the way to assess it. Famed basketball coach John Wooden said it best: "Never mistake activity for accomplishment."

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